Tuesday, May 11, 2010

What would you do without us?

World markets fell back today and the Euro sagged as the euphoria from the trillion dollar Euro bailout faded overnight. The euphoria turned out to just be a morphine rush and it’s sinking in that the economy is a terminal patient riddled with the cancer of predatory bankers and hedge funds. More people are beginning to doubt the long term value of currency as the central banks print more and more of it. In the digital age the phrase will need to be changed from “not worth the paper it‘s printed on” to “not worth the electrons that light up your computer screen“.

Gold bullion retailers say demand is the highest it has been the height of the panic in 2008 and prices have reached new highs. Although oil and other commodities that won’t fit in the personal safe are down sharply. This is partly from the USD going up relative to other major currencies making the USD go farther but not entirely so as precious metals are up sharply.

There is still no official word on why the flash crash occurred last Thursday but the fat finger trading theory has been laid to rest. The most rational explanation so far is that a hedge fund bought a large amount of derivatives betting that the stock market would crash. The people who sold them became nervous when the market turned down sharply and thinking that they were over extended with the market crashing, they themselves bought a much larger block of the same bets they had sold to cover themselves and a round robin of derivatives became a death spiral. This wouldn’t have affected actual stock prices except a machine somewhere was monitoring the derivative trading and mistaking this for a real trend, started selling stocks that it was in control of, and with no buyers it did as a slave to its programming, run the prices down to zero, all in a matter of seconds.

A real market panic would unfold much the same way with an event that turns into a trend and if enough traders are slaves to their programming or to their margin calls, the prices will run down to zero. The only thing that has kept this from happening is the injection of more and more cash from the Federal Reserve. Some where in the range of 14 trillion was created out of thin air during the panic two years ago to keep the myth alive that financial services is the driver of the economy and the Fed continues to lend at zero interest.

Yesterday’s trillion is already being seen as woefully inadequate. The right-wingers are saying we’re bailing out the socialists but the reality is we giving money to bloated banks so that they have enough cash flow to balance their books. They destroy the real economy so it’s harder and harder to support them and still they demand more since the world will end without them. “After all, look at how bad things are now, what would you do without us?” www.prairie2.com

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